Product Redesign MTAC Update Cost-Based Rates for Periodicals and Standard Flats

1. Product Redesign MTAC Update Cost-Based Rates for Periodicals and Standard Flats February 5, 2004

2. PRODUCT REDESIGN Agenda • Complaint Filing with PRC (Time Warner, et al) • Initiatives Not Requiring a PRC filing • Cost-Based Rate Structure

3. PRODUCT REDESIGN Complaint Filing with PRC (Time Warner, et al) • Complaint proposes new Periodicals rate structure • Postal Service response due February 11 • Overall approach similar to Redesign cost-based rates • New rate schedules for sacks, pallets & bundles • Incentives to go beyond current preparation • More flexibility, fewer rules • Specifics of complaint proposal differ from Redesign • Editorial pounds: zoned, with “unzoned” discount • Piece-rate categories: auto & nonauto each divided further into machinable / nonmachinable • Presort levels: Basic Presort split into Mixed-ADC / ADC • Destination-entry levels: DBMC discount added

4. PRODUCT REDESIGN Non-PRC Initiatives: 15-piece minimum • Raise Standard Mail 5-D bundle minimum to 15 for pieces not over 5 ounces and not over ¾-inch thick • Federal Register Proposed Rule: December 2003 • Major Theme in Comments: Make it Optional • Presort run before piece-weight is known ( > 5 oz?) • Pieces in 3-digit bundles may get slower service • Effect on USPS costs not known • Possible Adjustments: • Address 5-ounce boundary in acceptance • Optional for pieces between 4 oz and 5 oz? • Proposed Implementation: Summer 2004

5. PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing • Co-palletization: Allow mailers to put independently presorted bundles of Periodicals, Standard, and BPM flats together on the same pallet • Deeper entry, Periodicals pallet discounts • Co-mailing: Allow mailers to combine Periodicals, Standard, and BPM flats in the same bundle • Improved Bundle Presort (in addition to above) • Standard Mail Service • Explicit agreement with each participating publisher • Dropship appointments required

6. PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing Initial Mailer Assessment: • With current rates, participation may be limited • Some urge USPS to pursue, gain experience for future when cost-based rates may provide greater incentives • Build on experience with Periodicals co-palletization experiment • To be viable, USPS needs to allow mailers to: • Co-mail at all bundle levels including ADC & Mixed ADC • Prepare ADC Pallets (now limited to Periodicals) • Need a pallet level on which to place ADC bundles • Most new ADC pallets would be dropshipped • Move Standard Mail from ADC sacks to ADC pallets • 2 billion pieces of Standard Mail in ADC sacks

7. PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing • Exploring impact on USPS with Operations • Mixed-class ADC pallets would move some Standard Mail bundle sortation from BMCs to ADCs • Need mailer feedback on probable participation and volume shifts under two scenarios: • If ADC pallets & bundles are permitted • Mixed classes permitted at all bundle & container levels • If only SCF or finer pallets are permitted • Mixed classes not permitted in ADC / MXD-ADC bundles • Prepare ADC / MXD-ADC bundles of each class in separate containers

8. PRODUCT REDESIGN Cost-Based Rate Structure Fewer Rules, Not Zero Rules • Retain weight maximums for bundles, sack & pallets • May need lower limit on bundle-size due to bundle-integrity and equipment considerations • May need limits on how much “inefficient” preparation mailer is allowed to buy • Limit risk that unexpected mailer preparation changes will complicate USPS Operations adjustment • Initially, rate differences may be significantly smaller than USPS cost differences, so postage differences may not outweigh production or service benefits • Want to preserve flexibility for mailers to make decisions based on individual mailing objectives and preparation capabilities

9. PRODUCT REDESIGN Cost-Based Rate Structure 5-Digit Bundle Example When Objective is Low Postage • Make bundles for all 5-digits with at least as many pieces as the “absorption-doesn’t-pay” threshold • Threshold depends on container level • E.g., Threshold = 11 if bundle in SCF container, 17 in BMC container • Rank remaining 5-digits according to number of pieces • Starting with smallest 5-digit, put successive 5-digits in an existing 3-digit bundle. Stop when next 5-digit would push 3-digit bundle over weight-maximum • Either (a) make bundles for remaining 5-digits (will be smaller than those made in step 1) • Or (b) explore whether it would pay to combine remaining 5-digits into a new 3-digit bundle

10. PRODUCT REDESIGN Cost-Based Rate Structure Possible Sequence for Container Decisions • Standard Mail example • Get total pieces & weight for each BMC area and each SCF area while doing initial pass for address-coding • Decide which BMCs get separate containers • Dropship plans / commitments • Initial pallet vs. sack decisions for BMC containers • Within each BMC, decide which SCFs get separate containers vs. host BMC container • For subsequent bundle-level decisions, container level is more important than sack vs. pallet decision

11. PRODUCT REDESIGN Cost-Based Rate Structure • Next Steps Toward Cost-based Rate Structure • Quantitative market research: February – May 2004 • May start Standard Mail research first • Use hypothetical but close to possible rate structure (end of February) • Use Peter Moore software to evaluate effects of rates on mail preparation • Near-final market research numbers by late May • Be ready to feed into regular Omnibus rate case preparation process